Geopolitics, trade, and international business

A recent article by Douglas Bernhard, a lecturer at Wits Business School, caught my attention. Entitled ‘Navigating the mist of geopolitical upheaval’, Bernhard touches on a theme central to Tutwa’s raison d’etre. Indeed geopolitical upheaval is becoming a central narrative of our times; one which many businesses are aware of but have very little appreciation for. Bernhard’s central thesis is that geopolitics – the interplay between geography, politics and strategy in international relations – is back. Not only is it back, but it is the critical issue in determining the environments in which business is conducted.

We focus on geopolitical changes as part of our offering. Consider two recent flashpoints: Russia, Crimea and the Ukraine; and China-Japan relations in the context of the East China sea.

Rising Sino-Japanese tensions led recently to China’s imposition of an ‘air defence exclusion zone’ (ADIZ) in the vicinity of the Senkaku/Diayou islands, which has translated into growing uncertainty about air-traffic routes traversing the East China sea. The escalating cycle of Chinese naval and air incursions into what the Japanese government regards as its air space over these islands has precipitated Japanese military responses, notably through scrambling fighter jets at an increasing tempo, and more substantial deployment of naval vessels into the area. Both governments are increasing their military expenses, at a time of growing domestic financial imbalances. China recently establish a high powered national security council, whereas the Abe government in Japan is actively seeking to increase Japan’s military role in the region. Underlying all of this is historical tensions bordering on hatred, which I witnessed first hand in both Tokyo and Beijing last year. Both leaderships regard the United States as indecisive, in relative decline, and consequently both are challenging the established regional balance of power.

These growing tensions could conceivably culminate in war between the two countries. That terrible scenario would have immediate consequences for international business in the region, and across the world. Global value chains would be disrupted; financial markets would descend into turmoil; vulnerable countries would experience macroeconomic disruptions on a significant scale; and potentially both the Chinese and Japanese economies could head into a tailspin from which it would be difficult to recover. Clearly this would be a worst case scenario.

Similarly, rapidly escalating tensions in the Ukraine could escalate into a hot war, potentially sucking in key NATO members such as Poland, and to a lesser extent the Baltic states. I recently watched a prominent American history professor on Fareed Zakaria’s excellent weekly current affairs programme, Global Public Square. He made two striking points. First, that the western media has focused on the person of Vladmir Putin, in some quarters equating him to a modern Hitler bent on grabbing land and expanding Russian influence westwards in the face of weak western leadership. Sound familiar? Consequently he noted that there is little attempt to really understand broader Russian motivations in annexing Crimea and threatening similar action in Eastern Ukraine. Therefore, he argued that the unfolding crisis is ‘one step from a Cuban missile crisis; two steps from war’.

Disturbing stuff. The immediate consequences of war would probably not be as economically severe as in the case of an open Sino-Japanese conflict, but the military dimension could be substantially worse and would threaten to draw the United States and Russia, the two foremost nuclear powers, into open warfare.

Personally I don’t think war is likely in either scenario. Central to understanding this is US geopolitical calculations. Obama’s foreign policy is all about retrenching the US’ strategic posture, and moving to a more explicit balance of power strategy contingent on key players in key geopolitical regions.

It is likely that Putin’s calculated gambit will resonate in Washington. The Russia-Ukraine tangle is primarily about setting the limits of western encroachment into Russia’s sphere of influence. It is too easily forgotten that NATO expanded at a rapid pace after 1990, right up to Russia’s borders. Ukraine marks the geopolitical limits of this expansion, hence it is caught in the crossfire between western and Russian designs. It is probable that Putin and his inner circle are setting out a firm negotiating position, currently from a position of strength. As several prominent US geopolitical thinkers have recently proposed, this would hinge on a ‘Finland solution’ for Ukraine – independence (with a more federal political system), but NATO membership banned.

In East Asia it is clear that China has to be accommodated in regional power relations, not least by Japan but particularly by the US. Much of China’s posturing has to do with testing US reactions. Japan’s posturing has to do with trying to draw the US further in to supporting Japan’s ‘case’ in this regional realignment. In other words the geopolitics are likely to remain in an evolving balance, provided the US remains engaged in managing it.

A key part of both stories has to do with trade and investment relations. In the Asia-Pacific region the US is pushing its trans-Pacific Partnership (TPP) trade negotiations, which include Japan but exclude China. Similarly, it is pursuing the Transatlantic Trade and Investment Partnership (TTIP) with the EU, which does not include Russia. We have been deeply involved in analysing the implications of both potential agreements for non-parties and will comment on this in more detail in future posts, but for now it will suffice to say that the impacts could be substantial, especially for outsiders, but this incorporates both opportunities and threats.

Similarly, the longer the Ukrainian crisis drags on, the more likely it is that western sanctions and Russian retaliatory measures such as restricting gas supplies to western Europe, will escalate. That would have direct implications for international business, particularly those with direct economic interests in the region.

What does all this mean for South African business, and for foreign business in South Africa? First, the more these two geopolitical crises drag on, the greater the pressure on the South African government to choose sides. Given its soft spot for the BRICS grouping, it is likely that Russia (eg nuclear contracts) and China (eg transport infrastructure contracts) would be favoured. This could translate into more preferences being extended to firms from those countries in procurement contracts, at the expense of western firms. The BRICS business council seems to be pushing in this direction. Second, for South African firms competing in Africa with Chinese companies in particular, the SA government is less likely to intervene in their favour. In a continent where state support in international business transactions counts for a lot, that could make a substantial difference.